Billions at stake in greenhouse gas debate

Complicated cap-and-trade program may be windfall for some industries

By

WilliamL. Watts

WASHINGTON (MarketWatch) - Coming up with a solution to global warming will be easy compared with the political battles over who will pay for it.

A Senate subcommittee this week is expected to take up a proposal by Sens. Joe Lieberman, I-Conn., and John Warner, R-Va., to institute a nationwide cap-and-trade program designed to reduce emissions of carbon dioxide.

But before the United States ever adopts a cap-and-trade program, lawmakers and policymakers will be forced to answer several complicated questions. None may prove as thorny as determining how the government distributes the emission allowances that would make up the "trade" portion of the program.

The political reality on Capitol Hill may require substantial giveaways across several industries.

Under a cap-and-trade plan, the government establishes a "cap" limiting gas emissions. The government then issues credits, or allowances, equal to that capped level of emissions. Depending on the plan, the allowances would be made available to a wide array of polluters, including utilities, refiners, coal producers, manufacturers, transportation companies and others. They would then be allowed to buy and sell, or trade, the allowances between themselves.

Efficient producers could sell excess allowances, while heavier emitters could buy them. The market would set the price.

The process puts billions of dollars on the table. Studies show the emission credits could be worth anywhere from $50 billion to $300 billion, in 2007 dollars by 2020, depending on how the plan is constructed, according to the nonpartisan Congressional Budget Office.

Who pays and who doesn't?

With so much at stake, an intense lobbying battle is certain to surround the issue of how the allowances are distributed. Emitters have argued that they should be given the bulk of the credits, contending that auctions boost compliance costs and potentially run up energy prices for consumers.

Critics say that logic didn't work in Europe, where carbon dioxide allowances were handed out to producers for free, yet prices still rose.

Instead, environmentalists say the allowances should be distributed mostly, if not solely, via auction. That prevents polluters from reaping windfalls, and provides the government with revenue that can be used to temper the impact of energy price increases on consumers and workers in affected industries, they say.

Under the Lieberman-Warner proposal, the government would auction just 24% of the credits during the program's initial phase, which would begin in 2012.

Handing out allowances "is the same as handing out cash subsidies," said William Moomaw, director of Tufts University's Fletcher School Center for International Environment and Resource Policy, told the subcommittee in a hearing last week.

He urged lawmakers to scale back the number of allowances that would be handed out in the early stages of the program and to stop the free allocations altogether by 2025.

Meanwhile, there's plenty of room for infighting between industry sectors as well. The U.S. Climate Action Project - an organization made up of major utilities, manufacturers and other emitters - favors a cap-and-trade program but has so far steered clear of the debate over how to allocate emission credits.

Analysts say the political reality on Capitol Hill may require substantial giveaways across several industries.

"The real issue when you do these kinds of laws is how do you divide up the pain when everybody's got strongly anchored regional interests with fuels, with sectors," said Kevin Book, an energy analyst with Friedman, Billings, Ramsey & Co. in Arlington, Va.

Consumers will bear the burden

For consumers, one thing appears certain. They will pay higher prices.

"Regardless of how the allowances were distributed, most of the cost of meeting a cap on CO2 emissions would be borne by consumers, who would face persistently higher prices for products such as electricity and gasoline," the CBO wrote in a report earlier this year. Read the CBO report.

Higher energy prices are supposed to be part of the equation. Energy from sources that emit greenhouse gases would become more expensive, leading consumers to use less of that energy source.

Meanwhile, the question of how much of the cost will be borne by the nation's poorest households is a question that worries the Center on Budget and Policy Priorities, a liberal think tank that is urging lawmakers to significantly limit the number of allowances it hands out to industries for free, while using the revenue from the auctioned allowances to set up a program to help insulate the nation's poorest households from energy price increases.

Friedman, Billings Ramsey's Book says it remains unlikely Congress will be able to complete work on a cap-and-trade bill until there is a new president in the White House.

After all, it took three years to complete the tough regional and sector-related horse-trading needed to clear the way for the 1990 Clean Air Act, Book noted, adding that completing a cap-and-trade framework may be equally difficult.

"There is no overtly equitable way to do this. It has to be the most politically tenable way," he said.

Intraday Data provided by SIX Financial Information and subject to terms of use. Historical and current end-of-day data provided by SIX Financial Information. All quotes are in local exchange time. Real-time last sale data for U.S. stock quotes reflect trades reported through Nasdaq only. Intraday data delayed at least 15 minutes or per exchange requirements.